Over the past few weeks, Debt Service Coverage Ratio (DSCR) loan rates have decreased, despite no movement from the Federal Reserve on interest rates. Investors may be wondering why this is happening. The answer lies in a combination of recent stock market volatility, increased competition for secure investments like U.S. Treasury bonds, and the way DSCR loan rates are structured in relation to the bond market.
In this article, we will break down the key factors driving this trend.
Stock Market Volatility and Treasury Demand
The stock market has experienced significant fluctuations lately, leading many investors to seek lower-risk investment options. With concerns over economic uncertainty and potential inflationary pressures, investors have been moving capital into Treasury bonds. These bonds carry lower risk compared to equities. This surge in demand has driven down yields on these bonds, particularly on the 5-year Treasury note, which is closely tied to DSCR loan rates.
The Fed Sets Short-Term Rates, but Mortgages Follow Different Factors
Many people assume that all interest rates move in lockstep with Federal Reserve decisions. However, while the Fed controls short-term interest rates, longer-term investments like mortgages respond to a broader range of factors, including bond yields, investor sentiment, and inflation expectations.
Medium- to long-term Treasury bond yields influence mortgage rates, including DSCR loans, more than the Fed’s short-term rate moves. This is because mortgage-backed securities compete for investment dollars with these bonds, causing their rates to fluctuate based on supply and demand dynamics in the bond market.
DSCR Loans and the 5-Year Treasury Yield
Unlike conventional home loans that often follow the 10-year Treasury yield, DSCR loan rates more directly track the 5-year yield. The reason behind this connection is the average length of ownership for DSCR-financed investment properties, which typically ranges around five years.
Given this shorter investment horizon, lenders and secondary market participants price DSCR loans to be competitive with the 5-year Treasury bond yields.
How the Secondary Mortgage Market Influences DSCR Loan Rates
Lenders do not simply set DSCR loan rates arbitrarily; instead, they look at what yield investors demand in the secondary mortgage market. Typically, DSCR loans are priced with a spread above the 5-year Treasury yield. This spread compensates investors for the additional risk associated with real estate loans compared to risk-free government bonds. Historically, this difference has been around 2.5% to 4%, depending on market conditions and borrower risk factors.
With the increased competition for Treasury bonds pushing 5-year yields lower, DSCR loan rates have also trended downward. Even though the Federal Reserve has not lowered interest rates, the market forces affecting bond yields have indirectly resulted in more favorable DSCR loan terms for borrowers.
Why Now Might Be a Good Time for Long-Term Refinancing
Given the uncertainty surrounding the economy, inflation, and future Federal Reserve policy, now may be an opportune moment to consider refinancing long-term debt. If Treasury yields rise again due to shifting investor sentiment or inflationary concerns, DSCR loan rates may follow suit. Locking in a lower rate now can help real estate investors secure favorable financing before potential rate increases.
What This Means for Investors
The bottom line? DSCR loan rates give investors a rare window of opportunity—driven not by Fed headlines, but by deeper market shifts. While the stock market teeters and bond yields dip, real estate investors have a chance to lock in better long-term financing at a time when stability matters more than ever.
At Dominion Financial, we know that timing is everything in this business. Whether you’re growing your rental portfolio or refinancing to reduce monthly debt service, now may be the moment to act – before market sentiment flips again and rates head north.
If you’re thinking about refinancing or want to explore DSCR loan options tailored to your investment strategy, let’s talk. We’ve built our platform for moments just like this – where speed, insight, and execution make all the difference.
